Big picture better for CineMedia

Analysts see opportunity for sagging stock with Loews ad deal

Theater advertising firm National CineMedia went public a year ago at $21 a share and in six months climbed to almost $30. But it closed Wednesday at $20.90, and analysts since the beginning of the year have been arguing whether investors should buy the stock or wait out its slump a little longer.

Thomas Weisel Partners analyst Lloyd Walmsley was first to weigh in, slashing his estimates and rating on the stock just after the start of 2008.

His target went from $33 to $28, his 2008 revenue target from $400 million to $371 million and his 2008 earnings-per-share estimate from 80 cents to 66 cents.

Shares were pummeled on Walmsley's advice to his clients, prompting another couple of analysts to suggest buying the suddenly cheaper shares.

The price drop "creates a compelling buying opportunity," said Marla Backer of Soleil Research.

Pali Research analyst Richard Greenfield was more direct: "We view National CineMedia shares as a must-own media stock over the next 12 months."

To be sure, Walmsley isn't down on the sector or even the company, just on the stock in the near term.

At issue in the near term are first-quarter boxoffice comparisons with solid year-ago figures. A little bit longer term is the transition of Loews from being a Screenvision customer to a National CineMedia customer.

As for the former, Walmsley figured the first-quarter boxoffice numbers for the top 10 films will come in at $939.1 million, 10% lower than first-quarter 2007.

This quarter's big movies will probably be "National Treasure: Book of Secrets," "Alvin and the Chipmunks," "Semi-Pro," "Cloverfield," "10,000 B.C.," "Jumper" and "Horton Hears a Who!"

Last year's crop included "The Pursuit of Happyness," "Night at the Museum," "300," "Wild Hogs," "Ghost Rider" and "Bridge to Terabithia."

Greenfield addressed the first-quarter boxoffice concerns in his analysis the day after Walmsley's note, saying: "It's important to bear in mind that 2007 was not nearly as strong as many had expected earlier in the year, with attendance up only 1%." Presumably, therefore, the comparison shouldn't be as bleak as Walmsley predicted.

Guessing the first-quarter performance of potential blockbusters is a straight-forward but difficult exercise, the Loews situation could be a bit dicier.

Loews is slated to drop Screenvision in favor of CineMedia on June 1, mostly because Loews is owned by AMC Entertainment, an investor in CineMedia.

While Screenvision might no longer sell ad inventory at Loews theaters come June, the inventory that it sells until then includes ads that can run until November. Not only is this a confusing arrangement, but Screenvision also could choose to sell some of that inventory on the cheap rather than leave it for National CineMedia, some worry.

"The company itself will have little visibility into the available inventory from the Loews screens until they take over the screens June 1," Walmsley said.

Greenfield tackles that problem as well. "A key driver of the National CineMedia story is that advertisers are already aware that NCM will become a near-monopoly in major markets for cinema-based advertising in calendar 2009," he said in a more bullish take on the issue.

Walmsley agreed — sort of —though he doesn't see much need to jump the gun and buy shares too quickly.

"We continue to believe the company will be well-positioned to benefit from this transition period in 2009 with a strong national network, an enhanced competitive position and a more compelling offering from marketers," Walmsley said.

National CineMedia management noted that they already are responsible for at least selling seven minutes of ad time at the Loews screens, and some advertisers already are securing deals for 2009.

One thing all three analysts agree on is that onscreen advertising will thrive, even if the advertising industry — when looking at underlying performance that excludes the Beijing Olympics and U.S. elections — slumps this year in general.

"In an increasingly fragmented advertising landscape where media usage is exploding, National CineMedia's advertising proposition remains unique, and it is becoming an increasingly valuable medium to large brand advertisers," Greenfield said.
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